Earnings Call Transcript - WTTR Q1 2026

Operator, Operator

Greetings, and welcome to Select Water Solutions' First Quarter 2026 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Garrett Williams, Vice President of Finance and Investor Relations. Thank you, Mr. Williams. You may begin.

Garrett Williams, Vice President, Finance & Investor Relations

Thank you, operator, and good morning, everyone. We appreciate you joining us for Select Water Solutions' conference call and webcast to review our financial and operational results for the first quarter of 2026. With me today are John Schmitz, our Founder, Chairman, President and Chief Executive Officer; and Chris George, Executive Vice President and Chief Financial Officer. Before I turn the call over to John, I have a few housekeeping items to cover. A replay of today's call will be available by webcast and accessible from our website at selectwater.com. There will also be a recorded telephonic replay available until May 20, 2026. The access information for this replay was also included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, May 6, 2026, and therefore, time-sensitive information may no longer be accurate as of the time of the replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of Select's management. However, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management. Listeners are encouraged to read our annual report on Form 10-K, our current reports on Form 8-K as well as our quarterly reports on Form 10-Q to understand those risks, uncertainties and contingencies. Please refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures. Now I'd like to turn the call over to John.

John Schmitz, Founder, Chairman, President & Chief Executive Officer

Thanks, Garrett. Good morning, and thank you for joining us. I am pleased to be discussing Select Water Solutions again with you today. The first quarter of 2026 was a strong start to the year for Select. I'd like to start with some of the key first quarter highlights and other strategic and market updates. Then I'll hand it to Chris to discuss the first quarter financial results and forward outlook in more detail. The first quarter was a great start for the year for us. We executed within or ahead of our expectations across all parts of our business, continued to add new contracts to the portfolio and are well positioned for a strong rest of the year. During the first quarter, on a consolidated basis, we increased revenue by $19.5 million, increased adjusted EBITDA by $13.5 million and increased net income by $11.5 million as compared to the fourth quarter of 2025. Our Water Infrastructure segment performed very well in the first quarter, meaningfully outpacing our guidance for the period. During the first quarter, we increased our Water Infrastructure revenues by 19% relative to the fourth quarter of 2025. Additionally, Water Infrastructure gross margins before D&A increased to 56%, driving consolidated gross margins before D&A above 30% for the first time and to a new all-time high for the company. Across our Water Infrastructure network, we managed approximately 1.4 million barrels per day of produced water during the first quarter of 2026, with increases to both our recycling and disposal volumes. This resulted in a record quarterly segment revenue of approximately $97 million. Supported by the strong outperformance during the first quarter, our Water Infrastructure segment is well on track to exceed the high end of our previous full year guidance. We continue to focus on maximizing the value out of our invested capital across the system with increased commercialization and contracted service offering expansion. Since year-end, we have executed several new contracts across multiple basins, leveraging our existing networks to provide incremental committed volumes, tie-in opportunities or increased produced water flows and utilization throughout our system. For example, during the first quarter of 2026, we leveraged our market-leading disposal position in the Northeast region to sign a new multiyear disposal dedication agreement with a core customer while concurrently becoming the preferred water transfer provider for this customer. In total, since the start of the first quarter of 2026, we have added 3 new MVCs, 2 additional acreage dedications, 2 new ROFR dedications and 8 new interruptible agreements to our network across the Permian, the Northeast, Bakken and MidCon regions. While we still have a number of sizable growth capital expansion opportunities that we are targeting around our core network, I am very excited to see the progress in adding these low- to no-capital-required commercialization opportunities. These opportunities leverage the strength of the expanding networks we already have in place, add incremental revenue through the enhanced utilization and further bolster the flexibility and the water balancing capabilities of the network overall. More recently, here in May, we also closed on multiple acquisitions in the Northern Delaware Basin, adding approximately 4,000 acres of surface and minerals, 30,000 barrels per day of disposal capacity, 1,800 acre-feet of annual water rights and 500,000 barrels of storage across Texas and New Mexico. We expect these acquisitions to integrate efficiently and bolster the operational and economic development potential of our Northern Delaware network, and we will continue to look for opportunities to tactically add to our footprint in the region. Elsewhere in our Water Service segment, we outperformed our expectation in the first quarter with a 7% top-line revenue increase compared to the fourth quarter and remain very well positioned to capitalize on any activity uplift in the market associated with the current commodity price environment. Our Chemical Technologies segment continues to see strong demand for new product development, both in our core friction reducer product lines as well as our specialty surfactant product offering, which should drive strong double-digit percent revenue growth and margin uplift for the second quarter ahead. On the macro side of things, the recent geopolitical tension in the Middle East has changed the commodity outlook in a big way since the start of the year. While it is not yet clear what the long-term impacts are for the energy markets, what is very clear is that the U.S. energy industry will remain a critical stabilizer of a diversified global energy supply chain for many years to come. While we have yet to see any major behavioral changes from our customers' activity or pricing perspective, we are closely monitoring the commodity and activity outlook with our customers and are well positioned to support any uplift in demand, whether over the short term or the long term. In the meantime, on the revenue side, we expect to benefit from higher skim oil pricing within our Water Infrastructure segment. Separately, on the cost side, we will work to mitigate any impacts from higher commodity prices or supply chain disruptions. Overall, I am very pleased with the performance of the business year-to-date, and I believe we are well positioned to drive incremental growth in the quarters ahead. At this point, I'll hand it over to Chris to speak to our financial results and outlook in a bit more detail. Chris?

Chris George, Executive Vice President & Chief Financial Officer

Thank you, John, and good morning, everyone. Select made great strides in the first quarter, which included strong consolidated revenue, net income and adjusted EBITDA growth, record consolidated gross margins before D&A, record Water Infrastructure revenue and continued commercialization wins across our water infrastructure platform, strong outperformance in Water Services and a successful equity offering, enhancing the company's liquidity and balance sheet flexibility. Looking at our first quarter segment performance in more detail. As I mentioned earlier, Water Infrastructure posted a great first quarter. We grew both our recycled and disposed volumes in the first quarter, driving revenue growth of 19% compared to the fourth quarter of 2025 and more than 33% growth on a year-over-year basis relative to Q1 of '25. This led to record revenues of $97 million and very strong 56% gross margins before D&A, meaningfully outpacing our guided expectations. While we expect a relatively steady second quarter for the segment, with the strength of the first quarter growth and with additional projects coming online over the course of the second and third quarters, we are well positioned to exceed our original full year guidance for the segment. Accordingly, we are increasing our full year guidance to 25% to 30% year-over-year growth for the segment in 2026, up from the 20% to 25% growth previously forecasted. We still have a strong organic business development backlog for this segment, and I am confident in our ability to add additional contract wins across the year, both for greenfield expansion and ongoing commercialization opportunities. Switching over to Water Services. This segment saw revenues grow by about 7% sequentially, outpacing our guidance of steady revenues, driven by improved activity levels, strong gains in our water transfer business unit and increased spot market water sales. Gross margins before D&A in services increased to 21.8% during Q1, a solid improvement compared to 19.6% in the fourth quarter and our guided margins in the 19% to 21% range. While we forecast a modest low single-digit percentage revenue decline in the second quarter for Water Services, this decline is largely attributable to the nonrecurrence of certain sizable spot market water sales we benefited from during Q1. We anticipate margins to remain relatively steady in the 20% to 22% range in Q2. Overall, this segment is well positioned to participate in any activity upside and pricing opportunities that may arise with elevated commodity prices in the near term. In the Chemical Technologies segment, both revenue and gross margins in the first quarter of $78 million and 19% were in line with our guided expectations. Looking ahead to the second quarter, we expect strong sequential revenue growth of 10% to 15% as the business continues to see increased demand for both its core friction reducer and specialty surfactant product offerings. Additionally, margins for the segment should move upward into the 20% to 21% range as well. We are excited about the initial results of a number of our surfactant projects and looking at full year 2026, we do see the potential for upside to our original full year guidance for the segment. Looking back on a consolidated basis, in the first quarter, we decreased SG&A by more than 6% to $40.6 million or approximately 11% of revenue, showing good progress on our cost reduction efforts. Altogether, we saw consolidated adjusted EBITDA of $77.6 million during the first quarter of 2026, significantly above the high end of our guidance, largely resulting from the stronger-than-expected performance in our Water Infrastructure and Water Services segments. Looking forward into the second quarter, we expect continued strong performance across the business, resulting in adjusted EBITDA of $77 million to $80 million. Overall, we are very pleased with how our business has performed year-to-date in 2026 and with the current commodity price levels are encouraged by the potential tailwinds that could benefit our business as we look ahead to the remainder of the year. We continue to advance the commercialization and earnings potential of our Water Infrastructure business. And with the additional projects slated to come online in late Q2 and Q3, we expect to drive continued growth in the back half of 2026 and well into 2027 for the Water Infrastructure segment, which should support continued improvement in consolidated revenue and margin profile for the business. Looking at our other costs, D&A expense should remain fairly steady in Q2 at approximately $47 million to $50 million before modestly ticking up throughout the year into the low $50 millions as new capital projects are completed. Following the recent equity offering, we were able to fully repay our outstanding borrowings on the revolver and ended the quarter with $196 million of net debt outstanding and more than $300 million of total available liquidity. Relatedly, net interest expense decreased sequentially in conjunction with reduced borrowings, and we expect interest to remain in the $4 million to $6 million range per quarter in the near term. On the operating cash flow side, we had a relatively meaningful short-term drag on operating cash flow driven by increased accounts receivable. However, we expect this to largely cycle through during the year and convert back into cash in the near term. On the investing side, we spent $78 million of CapEx in the first quarter, primarily in support of infrastructure projects with an expectation that CapEx spend accelerates during the second quarter as the bulk of our ongoing capital projects target late Q2 and early Q3 completion. As John mentioned, we also closed on multiple acquisitions subsequent to quarter end, totaling approximately $29 million. These acquisitions can be integrated into our existing networks while adding accretive cash flows, attractive asset diversification and enhanced future development potential. Following the recent project wins and acquisition integration expectations, we now expect $200 million to $250 million of net CapEx in 2026, up from $175 million to $225 million. We maintain our expectation of $50 million to $60 million of this CapEx going towards ongoing maintenance and margin improvement initiatives this year. While we continue to capitalize on the growth opportunities in front of us, we believe we are setting the stage for strong long-term free cash flow generation as we look into 2027 and beyond. Outside of the sizable growth capital outlays, our business maintains a very maintenance-light capital model, and we have significant free cash flow generating capabilities and flexibility to manage this maintenance spend in accordance with market conditions without impacting our operational performance. In summary, the financial, operational and strategic results of the first quarter of 2026 demonstrated significant progress in our ongoing business evolution, and we are excited to continue building on these financial results and strategic successes. With that, I'll hand it over to the operator for any questions.

Operator, Operator

The first question is from the line of Jim Rollyson with Raymond James.

James Rollyson, Analyst, Raymond James

And congrats on a really nice quarter. I guess not to take the spotlight away from Water Infrastructure, but as we've seen this oil market kind of turn pretty remarkably post Iran conflict here. Obviously, I've heard a lot of commentary from other U.S. land OFS providers about prospects for things getting better. And you guys have kind of suffered through going on four years of impact there, especially in Water Services and to some extent, Chemical Technologies. So I would kind of love to hear your thoughts about what you see out there for prospects of that ramping up over the back half of this year, just kind of given the market shift here.

John Schmitz, Founder, Chairman, President & Chief Executive Officer

Yes, Jim, this is John Schmitz. Most of Water Services now have a big exposure to completion activity. It really relates to our Water Infrastructure, but moving water to the completion job is a big piece of our capture as well as the friction reducers or surfactants that we're building for the frac chemistry in the chemical side. We are having conversations now, and we are hearing from the market that the commodity price ramp and the effects of that are accelerating completions and bringing new oil online. We're starting to see that effect as our customers pull forward activity. We're also seeing customers who, for example, had four frac crews running and were planning to drop one in the second quarter. They're not dropping it now; they're keeping four running, whether that is through the horsepower of the frac company or through our customer base on the E&P side. We are hearing of adding more frac crews. So we do believe we'll see some intensity from the macro, probably first to see something pull forward, get to market faster, or increase the intensity of adding to the volume, refracking, or ensuring the oil is still being produced and sold.

Chris George, Executive Vice President & Chief Financial Officer

And maybe to just add on top of that, Jim, from a financial perspective, we'll be maintaining a close dialogue with our customers to see how their outlook and budgets change if activity gets pulled forward or stabilizes through the end of the year. For the chemicals business, we're guiding to pretty strong double-digit growth in the second quarter here, and that's without any material uplift in activity. It's driven by the intensity within that business. So based on the numbers we're putting in front of you, we're not taking an aggressive outlook on the activity framework yet. But whether it's Services, Chemicals, or Infrastructure, we're taking a sober approach to the macro outlook while remaining well positioned to capitalize on any uplift in activity or pull forward, and also the potential to stabilize or capture pricing opportunities, particularly on the services side.

James Rollyson, Analyst, Raymond James

Yes. It would certainly be amazing to see everything moving in the same direction for a change. And maybe, Chris, just as a follow-up. I don't want to get too far ahead of things here. But if I kind of take your first quarter numbers, your second quarter guidance and obviously, the implied pick up from incremental projects that start up in the second half, it kind of seems like you're on a pace to maybe have an exit run rate EBITDA somewhere approaching the mid-$300 million range. Am I doing my math right there?

Chris George, Executive Vice President & Chief Financial Officer

We're certainly not putting formal guidance out yet on the back half or into 2027. But with the strength of Q1 and the projects coming online in late Q2 and Q3, you should expect uplift into the third quarter. It's a little unclear what Q4 will look like. Heading into 2027, you're well positioned to see good, solid additional double-digit growth on an Infrastructure basis. Depending upon the outlook for Services and Chemicals, you're positioned to see EBITDA push toward the levels you described. The earnings capacity of the business is pushing in that direction, and we expect to continue adding contracted opportunities over the next couple of quarters as well.

Operator, Operator

Next question comes from the line of Bobby Brooks with Northland Capital Markets.

Robert Brooks, Analyst, Northland Capital Markets

First, I wanted to ask on the new Northern Delaware water supply and takeaway agreement. Reading the press release and listening to the prepared remarks, it sounds like a highly accretive bolt-on opportunity that you probably won given your footprint that you already had there. Am I thinking of that right? If so, could you give some more framework of how to think about how accretive this could be and maybe a little bit more color on how that win came about?

Chris George, Executive Vice President & Chief Financial Officer

Yes. Good read-through on that, Bobby. The first quarter commercial opportunities on the Infrastructure side were largely low capital or even no capital in terms of adding incremental volume growth through flow through the system over time, whether on an MVC basis, a dedication basis, or interruptible. From a capital deployment perspective, we are talking about something likely less than $5 million on an aggregate basis across those commercial arrangements. So it's very much leveraging existing invested capital or ongoing build-out that's already been underwritten for that footprint. We're excited about adding to that through commercial development. We still have some larger capital projects in the backlog and some more greenfield opportunities. But to the extent we can roll into ROFR cycles or add brownfield tie-ins under a committed capacity structure, it's a great outcome and accretive add-on to the system.

Robert Brooks, Analyst, Northland Capital Markets

Got it. And then one follow-up: I think you guys have talked about the cash-on-cash returns of greenfield opportunities being roughly three to five years. Is that a shorter timeline on these more tie-in opportunities?

Chris George, Executive Vice President & Chief Financial Officer

On the tie-in side, Bobby, you can certainly get an accelerated timeline given the strength of the existing footprint and the capital we've already invested. For greenfield project underwriting, you're correct — generally targeting around a four-year cash-on-cash as a base framework. We do have some chunkier opportunities ahead. As we roll new capacity or volumes onto the system, every barrel is an incremental accretive barrel from a margin and return on capital standpoint. Some ROFR executions will fall somewhere between a traditional greenfield build-out and a brownfield tie-in when done under a base dedication within the current footprint.

Robert Brooks, Analyst, Northland Capital Markets

Got it. That's super helpful. One last question for me: there's been a ton of news and movement about data center developments in West Texas and those facilities. If those facilities use evaporative cooling, they'll need a ton of water, which is obviously a specialty of yours. With that in mind, I'm curious to hear your thoughts about how your business and expertise might lead to opportunities within that build-out in West Texas and if that's something on your radar.

Chris George, Executive Vice President & Chief Financial Officer

It's very much on our radar, Bobby. We have a number of active and ongoing dialogues in that space, both on the water solutions side in terms of source water need for these projects and around applications such as services, rentals, power, and waste stream management, which are part of our core or ancillary business. We're actively engaged in understanding the marketplace. There will be a critical need for water solutions because water can be a gatekeeping item to getting some of these projects to the finish line, and we're focused on that.

Operator, Operator

Next question comes from the line of Derek Podhaizer with Piper Sandler.

Derek Podhaizer, Analyst, Piper Sandler

Maybe to keep going on that line of questioning, coming at it from a different angle, just overall M&A and looking at your portfolio and thinking about optimization. First off, peak rentals — you mentioned power in your response — and I know you stood that thing up, ring-fenced it, and are feeding in capital. So first, maybe let's start there on an update of how we should think about peak rentals moving ahead. And then separately, portfolio optimization and feeding growth projects like your friction reducers and surfactants: do you have the right footprint today to capture those growth tailwinds? Or could we see some potential bolt-on opportunities for that as well?

John Schmitz, Founder, Chairman, President & Chief Executive Officer

Yes, Derek, I appreciate the question on peak. There is no material change yet that we're ready to express. We're still actively evaluating all opportunities around that. Our efforts and direction have not changed. On the opportunity set, some of the acquisitions we announced reflect the kinds of assets that add enhanced value when they become part of our network. The network is different because it's built around recycling first. The ability to have dual lines — a distribution line to get frac fluids to the site and a gathering system to bring produced water into a recycling facility or expose it to disposal — makes assets fit our network in a meaningful way. When we bring such assets into our network, it enhances value due to the dual-purpose nature and scale.

Chris George, Executive Vice President & Chief Financial Officer

Over the last year, we've focused on what adds value and helps drive incremental returns to the footprint. That includes looking at opportunities historically considered tangential, like solids management, landfill opportunities, and solids treatment. We're also adding disposal capacity to manage asset risk and increase committed capacity potential. Anything that fits our life-cycle approach to waste stream management and supports customers' needs will be prioritized. Regarding chemicals, there's a very good opportunity set. We can execute meaningfully with our existing manufacturing base in the Permian, R&D and lab capabilities, product lines, and pilot efforts. If capacity becomes a constraint, we can flex up and add capacity to our existing footprint or supplement in East Texas in a capital-efficient way.

John Schmitz, Founder, Chairman, President & Chief Executive Officer

On the chemical side, we can expand throughput meaningfully at our plants. We also have a unique position to service customers and deliver chemistry and manage it throughout the fracking process. That localized capability and manufacturing near the customer gives us leverage to win more business and expand throughput capacity.

Derek Podhaizer, Analyst, Piper Sandler

Got it. I really appreciate the color, guys. Maybe switching to the capital outlook for the business: you upped CapEx this year given acquisitions and needs for capital. But Chris, in your prepared remarks, you talked about the company being set up for free cash flow generation in 2027 and beyond. Could you help us understand the interplay of the equity raise, the $300 million of total liquidity, free cash flow generation from Services and Chemicals, and how investors should think about long-term free cash flow generation, capital needs, and conversion from EBITDA?

Chris George, Executive Vice President & Chief Financial Officer

Sure. From a capital allocation perspective, the base maintenance needs are pretty light. We expect something like $50 million to $60 million of maintenance capital on the system, with a solid weighting toward Services. That's an effective position to reinvest efficiently. Last year and this year we've focused more on reinvestment and we have a good backlog of opportunities. If we execute additional contracts, capital deployment could look more like last year's profile than our current guide. Looking into 2027, we think earnings power will drive incremental free cash flow generation. The Infrastructure margin profile is well suited to generate strong free cash flow on a through-cycle basis over the life of these contracts. As growth capital maturates, those free cash flow opportunities will allow discrete choices. Services and Chemicals currently generate solid 70% to 80% free cash flow conversion out of gross profit, and Infrastructure on a stable basis should be similarly competitive. For now, we're focused on reinvesting to drive growth like we saw in Q1 and expect in the back half of the year.

Operator, Operator

Next question comes from the line of Don Crist with Johnson Rice.

Donald Crist, Analyst, Johnson Rice

I know you've answered this in a couple of different ways, but I'm hearing specifically in New Mexico that E&P operators were going to drop frac crews because of natural gas takeaway issues and the lack of flaring opportunities. I wanted to explore that and see if one, you're hearing that; and two, if operators are now keeping frac crews because of higher oil prices and that could set up a significant uplift in volumes across your system once natural gas takeaway pipelines come on in Q4 or Q1 next year, potentially driving significantly higher volumes across your system. Any comments around that? I'm hearing it more lately over the past couple of weeks.

Chris George, Executive Vice President & Chief Financial Officer

We're all watching new capacity coming online this year and into next year as a needed solution. Based on customer dialogues, we haven't seen any indication of a meaningful change in outlook due to natural gas takeaway concerns. Customer capital programs and schedules for bringing assets online over the next couple of quarters haven't changed materially. If anything, the main question is the commodity profile and how customers maximize potential around the current commodity outlook. We're thinking about it and focused on it, but that's the current lay of the land.

John Schmitz, Founder, Chairman, President & Chief Executive Officer

Don, a couple of things to add. We continue to see interruptible opportunities in that area, which has become a strategic source of work because of the network we've built. That has been meaningful. We're also talking with operators about alternative ways to use gas — movement, heat-related applications, power generation — to address the challenge. But we're not hearing from operators that they're planning to slow down their programs.

Donald Crist, Analyst, Johnson Rice

I appreciate that. I know you don't like to talk about things before they are fully baked and ready to go into guidance. But on the data center opportunity, obviously one of your main competitors is talking about how big it could be. Do you see the data center opportunity on the water side being a significant opportunity for many years to come, with the potential for long-term contracts like some competitors are seeing?

John Schmitz, Founder, Chairman, President & Chief Executive Officer

We see our position in the Permian as unique. The relationship between our Service and Infrastructure business units is a very positive way to address what these projects need. We are having those conversations around water. This company was built on the skill set of how you procure, treat, move, store, and recycle water, and it's also built on intense operations in remote areas. We've been executing complex projects for a long time. That operational skill set and the way the company is built allow us to support these efforts effectively.

Operator, Operator

Next question comes from the line of Nick Armato with Texas Capital.

Nicholas Armato, Analyst, Texas Capital

Congrats on the strong quarter. On the disposal and service agreements in the Northeast, can you provide some color on the structure of the agreement and the potential revenue uplift you are expecting? Additionally, could you provide a brief overview of water handling needs in the basin and how they compare with the broader Permian complex as well as the potential for additional agreements similar to this going forward?

Chris George, Executive Vice President & Chief Financial Officer

We're excited about the opportunity set in the Northeast. We are the largest traditional disposal provider in the basin. It is a challenging market to operate in given regulatory complexities across multiple states and the geography. The contract you mentioned was a very good one for us following a late last year execution where we added a large transfer dedication on top of an infrastructure relationship. This new agreement adds a water transfer relationship paired with a sizable disposal dedication. We're able to leverage our leading disposal position and market share in that basin to continue to engage in dialogue like this. We're optimistic about continuing to add relationships that link Services and Infrastructure where our strengths overlap. The Northeast and Haynesville provide meaningful upside for gas market demand over time. From a market dynamics perspective relative to the Permian, the Permian is fundamentally different in scale — larger production scope, bigger water volumes, and greater intensity of fracs — so the solutions and scale differ. We'll continue to weigh capital priorities toward the Permian, but we see good opportunity elsewhere.

John Schmitz, Founder, Chairman, President & Chief Executive Officer

If you look at Select's history, applying last-mile logistics or water transfer along with water infrastructure has allowed us to generate better margins on the service side. Bringing those two things together creates real value for customers, and we can capture a portion of that value. In the Permian, the focus is recycle-first and balancing water. Recycling produced water means you need a water transfer system to get produced water to the frac site. That is different than transferring fresh water. Select's tie-ins, automation, and interaction with that infrastructure bring meaningful value and should let us capture a share of it.

Nicholas Armato, Analyst, Texas Capital

Perfect. Maybe shifting over to the municipal business. Could you offer some color on how that project is progressing? And in light of the stronger commodity environment, how do you think about opportunities like this relative to the more traditional oil and gas-related ones?

Chris George, Executive Vice President & Chief Financial Officer

On the municipal project up in Colorado, no material updates today other than continued progress toward contracts by 2027 and putting incremental capital to work. It's a slower development cycle working with municipal counterparties versus oilfield counterparties, but we feel good about the position and potential to move by 2027. Regarding capital allocation choices between diversification and core energy opportunities, our view hasn't changed: we'll focus on the right return profile and how to add stability and contracted cash flows over time. We will prioritize competitive return profiles among growth opportunities, but we remain committed to developing the municipal opportunity alongside our core business. Beneficial reuse as a technology brings freshwater to market and can serve a diversity of consumers — oilfield, industrial, or others — and those opportunities can move in tandem as beneficial reuse matures over the next couple of years.

Operator, Operator

Next question comes from the line of Jeff Robertson with Water Tower Research.

Jeffrey Robertson, Analyst, Water Tower Research

John, given some of the comments around free cash flow growing into 2027, can you talk a little bit about your thought process around returning cash to shareholders through a repurchase program and a common stock dividend?

John Schmitz, Founder, Chairman, President & Chief Executive Officer

I think we are building a company with a low maintenance capital requirement. As growth capital maturates, we believe the company will be able to focus on regular dividends and the growth of that dividend. We're typically more tactical on buybacks — we've repurchased opportunistically in the past when the stock was affected by market events. But we do believe the business we are building will support regular dividends and other capital allocation decisions as free cash flow grows.

Chris George, Executive Vice President & Chief Financial Officer

Whether it's a base dividend that grows over time to add stability through cycles, or repurchases funded by excess free cash flow, all options are on the table as we transition strategically. We'll be tactical around repurchases, but as we generate incremental free cash flow, we'll balance growth and shareholder returns appropriately. For now, the immediate focus is executing the growth opportunities in front of us.

Jeffrey Robertson, Analyst, Water Tower Research

One question on the assets, the Black River Ranch and the surface acreage bought in New Mexico. Can you talk about how that fits into your Delaware Basin system?

Chris George, Executive Vice President & Chief Financial Officer

When we look at our full footprint build-out in New Mexico, owned surface positions that overlap our infrastructure build-out provide immediate strategic benefits, such as easement access and lower cost structure. Using that surface to develop incremental capacity — storage, disposal, recycling — offers opportunities to the footprint. If we can add accretive returns through royalty or mineral structures along with surface ownership, that's high-margin for us. We look at what best fits the profile of the system and will continue to find opportunities like that when they provide strategic benefit to the build-out or give us leverage to develop new capabilities.

John Schmitz, Founder, Chairman, President & Chief Executive Officer

Beyond just buying surface and harvesting royalties, we're finding that the asset base — the water itself, location, surface ownership, and pipe network — allows us to create repeatable, high-margin royalty-type revenue streams within the company that differ from a typical service model. That's becoming more apparent as we build out the network and acquire surface or create relationships between waste stream and fluids management.

Operator, Operator

Next question comes from the line of John Daniel with Daniel Energy Partners.

John Daniel, Analyst, Daniel Energy Partners

John and Chris, with the market heating up a bit, what are the opportunities right now for you to talk to customers about incremental pricing opportunities? Are you having those yet?

John Schmitz, Founder, Chairman, President & Chief Executive Officer

Yes. There are conversations we have to have because of procurement pressures. Some of that is built into contracts and some is not, but those conversations are active and well received. Where we can demonstrate value to customers who need to do more with less and achieve better results, price conversations are constructive. Customers who see the value will share in that price, and we've had good success in those discussions.

Chris George, Executive Vice President & Chief Financial Officer

As John mentioned, integrating service capability with infrastructure contracts typically results in a more productive margin outcome. That can also have revenue benefits. On the chemicals side, pushing into higher-margin specialty applications, whether friction reducers or specialty surfactants, we can price more effectively because those solutions help customers create more oil production from the reservoir, and we can share in that uplift.

John Daniel, Analyst, Daniel Energy Partners

Can you remind me roughly what percent of your business you would characterize as spot and therefore opportunities for incremental pricing later this year?

Chris George, Executive Vice President & Chief Financial Officer

On the Services side, you'll have a mix of integrated pricing relationships tied to infrastructure contracts, medium-term relationships tied to pad or well programs, and some spot or call-out work. There's no expectation that we can't be responsive to market conditions. On the Infrastructure side, you have more defined long-term contracted structures that provide strong outcomes and return profiles regardless of market conditions. Overall, we don't see any limitation in our ability to capitalize on market opportunities.

John Schmitz, Founder, Chairman, President & Chief Executive Officer

One additional point: the market has become extremely intensity-driven, with 24-hour operations and greater emphasis on scheduling, planning and engineering. Even our call-out business now often has MSAs or pricing arrangements tied to infrastructure. That has changed the industry. But the ability to take a call and execute a job is still intact, and if activity torques up, we can take the calls and execute profitably. The change has been in planning, engineering and execution to avoid downtime.

Chris George, Executive Vice President & Chief Financial Officer

One more point on Infrastructure: skim oil is a significant mover. We generate a good amount of skim oil out of the infrastructure footprint. Any uplift in commodity prices is an upside opportunity as we continue to extract skim oil, whether through recycling, disposal, or solids management. Additionally, the more we can reuse barrels versus dispose of them, the more opportunity we have to maximize revenue and the value stream out of those barrels.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the floor over to John Schmitz for closing comments.

John Schmitz, Founder, Chairman, President & Chief Executive Officer

Thanks to everyone for joining the call. We appreciate your continued support and interest in learning more about Select Water Solutions. We look forward to speaking to you again next quarter.

Operator, Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time.